What are business loans used for?

If you’re applying for business finance, you may be wondering “what are business loans used for?” and “what type of business loan is most suitable for my needs?” The good news is that, with so many business loans on offer, there’s probably one suitable for your business. Business loans are designed for all sorts of uses, from buying a business premises to helping with cash flow problems.

In this guide, we take a look at what business loans can be used for and answer common questions like “what type of loan is most suitable for a small business?” and “what business loan has the quickest application process?”

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What are business loans used for?

Business loans can be used for anything from starting a new business, to expanding an existing business. They can be used for purchasing new assets, helping with cash flow problems, funding a seasonal business or buying a business premises. Think of any business strategy or goal and there’s probably a loan to match it.

There is a wide range of business loans and also a wide range of lenders to help you find suitable finance. Some loans are designed for small businesses, whereas others are suitable for helping established big businesses expand.

A summary of the main uses of business loans

Here is a summary of some of the main uses of business loans, and possible finance types or loans to match.

Business usePossible finance typesThings to consider
Starting a businessEquity finance, crowdfunding, peer-to-peer lending, start up loan, personal loanIt may be difficult to get funding as a brand new business. You may need to fund the business yourself until it is more established.
Improving cash flowBank overdraft, working capital loan, business line of credit, merchant cash advance, invoice financeMay need quick and flexible finance
Funding a seasonal businessBank overdraft, working capital loan, business line of credit, merchant cash advance, invoice financeFlexible loans may be more suitable as you can repay a loan once business picks up.
Buying assetsAsset finance, hire purchaseAsset finance is usually secured on the asset you are purchasing.
Funding a business expansionEquity finance, simple business loan, crowdfunding, peer-to-peer lending.The type of finance depends on the age of your business, your existing finances and the amount you need to raise.
Buying a premisesCommercial mortgage, bridging loan, auction finance, remortgageCommercial mortgages are usually cheaper, but less flexible than bridging loans.
Buying another businessEquity finance, mezzanine debt, private debtMay need flexible options as it may not be clear when you can repay the loan.

Business loans to start a business

If you’re looking for finance to start a new business, then the type of loan available will depend on the stage of your start up business. Many lenders require some evidence of your financial performance before lending to a business, which can make it difficult for very new businesses. Here’s a summary of some of the funding options that may be available:

  • Self-funding - many business owners decide to invest their own money or go into business in partnership with a family member.
  • Equity finance - this involves selling part of your business to an angel investor or group of investors in exchange for funding. It’s cheaper in the short term than debt finance and you may get the benefit of expertise from the investor to help grow your business. Investors will still want to see a developed business plan and strategy.
  • Crowdfunding or peer-to-peer lending - this is arranged through a crowdfunding or peer-to-peer lending platform. Individual investors will lend or invest based on your marketing pitch.
  • Start up loans - many lenders still require some evidence of your business’s financial performance. Most lenders state their eligibility criteria on their website so you can check in advance if you are likely to be accepted. You may need to consider a secured loan or one with a personal guarantee for a start up loan.

Business loans to improve cash flow or fund a seasonal business

If you’re struggling with your business cash flow or you’re funding a seasonal business then you may decide to apply for a short term loan to help. Here’s a summary of some possible funding options:

  • Bank overdraft - this is perhaps the most common type of short term business finance. With a bank overdraft you can borrow and repay amounts up to your agreed limit and you’re charged interest on the outstanding amount.
  • Short-term loan - a loan of 3 to 12 months might be a good option if you want a simple, fixed-term loan for your business. It works just like a traditional long-term business loan, where your business borrows an agreed amount from a lender and repays it in instalments over the period of the loan.
  • Business line of credit - this is a flexible loan that works a bit like a bank overdraft. Your business can borrow and repay amounts up to an agreed upper loan limit. Just like an overdraft, you’ll be charged interest for the loan based on how much you have outstanding at any time.
  • Merchant cash advance - this is a type of short term loan for businesses that use a card terminal for customer payments. With a merchant cash advance borrowing is repaid through customers’ card payments and repayments are processed automatically by the card terminal provider.
  • Invoice finance - your business raises funds against the value of its outstanding invoice book.

Business loans for buying assets

Loans for buying assets will help you rent or gradually buy the asset over its useful life and are often secured on the assets themselves. Lenders will usually only fund up to 90% of the purchase price.

There are different types of asset finance, including the following:

  • Hire purchase - your business pays for an asset gradually and owns it at the asset at the end of the hire purchase period.
  • Equipment leasing - this is often slightly cheaper than hire purchase as you won’t own the asset at the end of the lease period.
  • Contract hire - this type of equipment leasing is only used for vehicles.
  • Soft asset financing - this is for assets with lower value like computer hardware or office furniture.
  • Asset refinancing - this is used to release cash by taking out a loan on existing equipment.

Business loans for expanding your business

Business loans for expanding your business are similar to loans for starting a business. However, if you have an established business, you may have more funding options. Just like a start up loan, the type of finance available depends on your business’s financial situation and the age of your business.

Here are some of your funding options:

  • Traditional or simple business loan - you may be able to apply for a traditional bank loan or simple business loan if you’re an established business. Most lenders will need to see evidence of your business plans and financial records before they approve lending.
  • Equity finance - you can often raise more finance through equity investment than business loans, but it will mean selling part of your business.
  • Crowdfunding or peer-to-peer lending - you need to develop a great marketing pitch to encourage individual investors to lend or invest.

Business loans for buying property

If you’re buying a business property, then what are your funding options. You’ll be pleased to know you have several options including the following:

  • Commercial mortgage - this is a short or long-term business loan secured on a property. It works like a residential mortgage with lenders offering discounted or fixed interest rate periods and a range of terms from between 3 months to 30 years. Lenders will value the property and assess your business’s eligibility before offering a mortgage.
  • Bridging loan - this is a relatively expensive short-term loan of up to 12 months to pay for building, development or refurbishment costs (read more here)
  • Auction finance - some auction houses provide specialist auction funding if you buy a property at auction. This is a short-term lending option and may require repayment within 28 days.
  • Remortgaging - if your business already owns a property portfolio, you may be able to release equity by remortgaging those properties.

Business loans for buying another business

If you’re buying another business then there are several options for business finance, including the following:

  • Secured term loan - this is also called senior debt because it takes priority over other unsecured debt if your business becomes insolvent.
  • Cash-flow or working capital loan - you raise finance based on the expected future cash-flow of your business.
  • Mezzanine debt - this type of loan can be converted into equity if it's not repaid.
  • Asset based lending - you can use the assets of the new business as security for a loan.
  • Private debt - this is a loan offered through a private company rather than a bank.

Frequently asked questions

What type of loan is most suitable for a small business?

Smaller businesses can apply for most types of business loans as long as they meet the eligibility criteria. Just like a larger business, it’s important to make sure the type of finance suits the use of the loan. For example, if you’re buying equipment or a vehicle then it may make sense to secure the loan against those assets.

Some lenders specialise in loans to bigger businesses and will only lend if you have a minimum turnover. Most lenders will list their lending criteria on their website so you can check in advance if your business is likely to be accepted for a loan.

What type of business loan is suitable if I have bad credit

If you or your business have a bad credit rating, it may be easier to get a business loan with a specialist business loan broker. They will be able to give you advice on the most suitable type of business loan and search the market for you.

Lenders consider loan applications on an individual basis so you may still be accepted even if you have bad credit. Some lenders offer soft credit searches so you can see if you’re likely to be accepted before you proceed with a full application.

Certain loans like a merchant cash advance are worth considering if you have bad credit. Because the loan is paid directly from future card sales, you may be more likely to be accepted if you have a bad credit rating.

What business loan has the quickest application process

Many specialist business loans providers pride themselves on their quick application process. You may receive funding within a few days as long as you meet the eligibility criteria.

It’s a good idea to prepare for your loan application by gathering together information like your bank statements, financial records and details of assets used for security.

Secured loans such as asset finance, commercial mortgages or business acquisition loans, may be slower to arrange as they require a detailed asset valuation.